Forex Market: GBP/USD trading outlook for October 3rd 2016

Friday’s trade (in GMT terms) saw GBP/USD within the range of 1.2937-1.3024. The pair closed at 1.2978, inching up 0.08% compared to Thursdays close. It has been the 162nd gain in the past 350 trading days. The daily low has been an almost exact test of the low from September 27th. In weekly terms, GBP/USD added 0.11% to its value during the past week. It has been the 19th gain in the past 39 weeks, but yet, the smallest one since the week ended on February 14th. The major pair depreciated 1.23% in September, after losing 0.72% in August. September has been the fifth consecutive month of decline.

At 7:13 GMT today GBP/USD was losing 0.76% on the day to trade at 1.2879. The pair touched a daily high at 1.2948 during the early phase of the Asian trading session and a daily low at 1.2873 during early European trade.

On Monday GBP/USD trading may be influenced by the following macroeconomic reports as listed below.

Fundamentals

United Kingdom

Manufacturing PMI by Markit/CIPS

Activity in United Kingdom’s sector of manufacturing probably expanded for a second consecutive month in September, with the corresponding Purchasing Managers’ Index coming in at a reading of 52.1, according to the median forecast by experts. In August, the PMI was reported at 53.3, recovering from a final 48.3 in July (a 41-month low). It has been the highest month-over-month index increase in 25 years, supported by a sharp recovery in the sub-gauges of new orders and production. In addition, the sub-index of employment registered growth for the first time in 2016.

The index is based on a survey, encompassing managers of companies, operating in sectors such as manufacturing, mining, utilities. They are asked about their estimate in regard to current business conditions in the sector in terms of new orders, output, employment, demand in the future. Values above 50.0 signify that respondents are rather optimists about business conditions in the sector than pessimists.

In case the PMI came above expectations in September, this would have a strong bullish effect on the Sterling. The Chartered Institute of Purchasing and Supply (CIPS) is expected to release the official PMI reading at 8:30 GMT.

United States

Manufacturing PMI by Markit – final reading

The final estimate of the Manufacturing Purchasing Managers’ Index for September probably confirmed the preliminary reading of 51.4, according to the median forecast by analysts. In August, the final seasonally adjusted PMI stood at 52.0, inching down from a preliminary 52.1.

According to the preliminary report by Markit, ”Softer rates of output and new business growth were the main factors weighing on the headline PMI during September. Moreover, the latest expansion of manufacturing production was the weakest for three months. Survey respondents suggested that relatively subdued economic conditions had acted as a brake on new order volumes, while there were also reports that the strong dollar had dampened export sales.”

”Backlogs of work increased only marginally in September, with the latest accumulation of unfinished business the slowest since May. Despite a lack of pressure on operating capacity, manufacturers indicated a rebound in job creation from the four-month low seen during August.”

”Purchasing activity picked up again in September, which marked five months of sustained growth. At the same time, stocks of inputs decreased at the slowest pace since February. However, manufacturers remained cautious in terms of their holdings of finished goods during September, with the latest fall the fastest recorded for almost one year”, Markit stated.

Values above the key level of 50.0 indicate predominant optimism (expanding activity). In case the final PMI for August outstripped market expectations, this would lead to a moderate bullish impact on the US dollar. The final reading is due out at 13:45 GMT.

Manufacturing PMI by the ISM

Activity in United States’ manufacturing sector probably expanded in September, with the corresponding manufacturing PMI coming in at a reading of 50.5, according to market expectations. In August, the gauge unexpectedly tumbled to 49.4, or its lowest reading in 7 months. It came after five consecutive months of expansion.

The New Orders Index came in at 49.1 in August, tumbling from 56.9 in July. The sub-gauge of production was reported at 49.6 in August, falling from 55.4 in the preceding month. The index of employment fell further to a value of 48.3 in August from 49.4 in the previous month. The gauge of prices was at 53.0 in August down from 55.0 in July, which suggested higher prices of raw materials for a sixth straight month, but also a slower rate. In August, out of a total of 18 manufacturing industries, 6 reported an expansion, 11 reported a contraction and 1 reported no change in overall business activity, according to the report by the Institute for Supply Management (ISM).

Readings above the key level of 50.0 are indicative of expanding activity in the sector of manufacturing. In case the PMI recovered more than anticipated in September, this would have a strong bullish effect on the US dollar. The Institute for Supply Management (ISM) is to release the official reading at 14:00 GMT.

Correlation with other Majors

Taking into account the business week ended on September 30th and the daily closing levels of the major currency pairs, we come to the following conclusions in regard to the strength of relationship:

GBP/USD to AUD/USD (0.8386, or very strong)
GBP/USD to NZD/USD (0.7671, or strong)
GBP/USD to USD/CHF (0.6147, or strong)
GBP/USD to USD/CAD (-0.2291, or weak)
GBP/USD to USD/JPY (-0.4449, or moderate)
GBP/USD to EUR/USD (-0.6766, or strong)

1. During the examined period GBP/USD moved strongly in one and the same direction with NZD/USD and USD/CHF, while moving strongly in the opposite direction compared to EUR/USD.

2. GBP/USD moved almost equally in one and the same direction with AUD/USD during the past week.

3. The correlation between GBP/USD and USD/CAD was insignificant.

Bond Yield Spread

The yield on UK 2-year government bonds went up as high as 0.138% on September 30th, or the highest level since September 20th (0.144%), after which it closed at 0.110% to add 3.2 basis points (0.032 percentage point) compared to September 29th.

Meanwhile, the yield on US 2-year government bonds climbed as high as 0.766% on September 30th, after which it fell to 0.765% at the close to add 2.7 basis points (0.027 percentage point) compared to September 29th.

The spread between 2-year US and 2-year UK bond yields, which reflects the flow of funds in a short term, narrowed to 0.655% on September 30th from 0.660% on September 29th. The September 30th yield spread has been the lowest one since September 23rd, when the difference was 0.651%.

Daily, Weekly and Monthly Pivot Levels

By employing the Camarilla calculation method, the daily levels of importance for GBP/USD are presented as follows:

R1 – 1.2986
R2 – 1.2994
R3 (Range Resistance – Sell) – 1.3002
R4 (Long Breakout) – 1.3026
R5 (Breakout Target 1) – 1.3054
R6 (Breakout Target 2) – 1.3065

S1 – 1.2970
S2 – 1.2962
S3 (Range Support – Buy) – 1.2954
S4 (Short Breakout) – 1.2930
S5 (Breakout Target 1) – 1.2902
S6 (Breakout Target 2) – 1.2891

By using the traditional method of calculation, the weekly levels of importance for GBP/USD are presented as follows:

Central Pivot Point – 1.2984
R1 – 1.3053
R2 – 1.3127
R3 – 1.3196
R4 – 1.3264

S1 – 1.2910
S2 – 1.2841
S3 – 1.2767
S4 – 1.2692

In monthly terms, for GBP/USD we have the following pivots:

Central Pivot Point – 1.3113
R1 – 1.3312
R2 – 1.3645
R3 – 1.3844
R4 – 1.4042

S1 – 1.2780
S2 – 1.2581
S3 – 1.2248
S4 – 1.1914